Daily Development for Tuesday, February 10, 2004 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu MORTGAGES; TRUTH IN LENDING; "LOAN SPLITTING:": The U.S. District Court for the Eastern District of Pennsylvania has ruled that, in the Third Circuit, a lender's splitting a loan into two loans in a manner inconsistent with the borrower's expectations could lead to a successful claim of "loan splitting" under the Federal Truth-in-Lending Act. Furthermore, the Federal Home Ownership and Equity Protection Act might apply to two loans that, if combined, would be subject to that act. Kane v. Equity Once, Inc., 2003 WL 22939377 (E.D.Pa.). The plaintiff borrower (the "Borrower") brought an action against certain banks (the "Lender") for, inter alia, violating the federal Truth-in- Lending Act ("TILA"), 15 U.S.C. 1601-1693 and the Federal Home Ownership and Equity Protection Act ("HOEPA"), Pub.L. No. 103-325, it. I, 151, which augmented TILA. After being solicited by the Lender to refinance the wrap-around mortgage on her home and her son's home, the Borrower went to the Lender's office to sign the loan documents with the expectation that the transaction would be structured as one loan. Instead the Lender created two loans with two sets of loan documents including two separate Federal Truth-in-Lending Disclosure Statements and Settlement Statements. The loan secured by the Borrower's son's home included a $1,415.55 charge for a gas bill. The Borrower later sought to rescind the loan pursuant to TILA and HOEPA. The Lender filed a 12(b)(6) motion to dismiss with respect to these claims, inter alia. According to the court, in order to succeed with a 12(b)(6) motion, it must be clear that relief cannot be granted to the plaintiff under any set of facts that could be proven consistent with the complaint's allegation. 1) TILA Claim The Borrower sought to rescind the loans under TILA because the Lender structured her mortgage refinancing as two separate loans instead of one closed-end transaction in accordance with her expectations. The Lender contended that TILA allowed for lenders to structure transactions in separate loans and the court agreed. However, in this context the court found that a violation under TILA might have arisen. Although the Third Circuit had not yet encountered a similar claim, the court noted that other courts had found that "loan splitting" violated TILA in the situation where a borrower "wants, requests and expects to get a single loan consummated in a single transaction, but the lender instead documents and makes disclosures for the loan as if it were two separate transactions." Harris v. Ill. Vehicle Premium Fin. Co., 2000 WL 1307513, 2 (N.D.Ill. Sept. 12, 2000). The court then cited the complaint in which the Borrower alleged that she had been rushed through the settlement and did not know until she arrived to sign the loan documents that the Lender was issuing two loans. The court thus found that the Borrower's allegations were sufficient to make out a case of "loan splitting" and therefore the court denied the Lender's motion with respect to this claim. 2) HOEPA Claim HOEPA applies to consumer credit transactions that secured by the consumer's principal dwelling if, inter alia, the total fees payable at closing exceed $400. These "high fee" loans required considerably more disclosures. The Borrower claimed that HOEPA applied to the transaction because, if the two loans had been created as one as she desired, then that loan would have been secured by her principal dwelling and would have included the $1415.55 gas bill a fee exceeding $400. The court found that, despite the novelty of the claim, and the failure to find any case law applying HOEPA to similar facts, HOEPA might apply in this context. Payments required by a double loan that was supposed to be a single loan might bring the whole transaction within the "high fee loan" requirements. The Lender argued that the gas bill was not a finance charge because the Lender did not require the use of the third-party gas company and the Lender did not retain any portion of the charge. The court's discussion of this issue is fuzzy. Apparently it was of the view that possibly the lender charged twice for these gas fees, and kept the money, which make that portion that the lender kept a "loan fee." It remanded for a determination of fact on that issue. Comment: This probably is a very narrow decision with few extensive ramifications, but the editor is not completely familiar with specific loan practices as to specific types of loans, and guesses that there may be perfectly legitimate loan practices with respect to high risk borrowers that might fall into this area, and lenders may want to be careful about what borrowers might perceive as "last minute switcheroos." 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